Dealership finance might be convenient but it pays to make sure your loan won’t come with a sting in the tail
When purchasing a new car people can often be bustled into the office and offered dealership finance options on the spot. It’s appealing to sign your name on the dotted line and leave the dealership with the keys in your hand, but do you really know what you are signing up for?
Here are some of the tricks they may try with you when you take the dealership finance option.
1. Giving you a verbal quote — only on the interest rate
The dealer will be able to hide the true cost of your loan behind a competitive interest rate. This can often convince you to rule out your alternatives before you’ve properly considered them. To do your homework on a dealership finance offer and compare it to the other options on the market you need to get a detailed quote from them, in writing, that outlines the fees, loan term, interest rate, repayments and the end-term balloon (if applicable).
2. Building a buffer into your car price
You might think you have negotiated a great deal for your car purchase, however if the dealer offers you finance that seems too good to be true you should ask yourself: “Where is the dealer making their money in this transaction?” Often the dealer can offer highly competitive finance options if they’ve achieved a good profit margin on the car sale, or under-valued your trade-in. If you suspect this is the case you should speak to a buyer’s agent.
3. Giving you a longer loan term
Most borrowers have a keen eye for spotting a high interest rate, or a hefty loan repayment, but a six or seven year loan term might slip under your radar. By stretching the loan term by an extra year or two the lender will be able you offer you a lower repayment amount. Don’t be fooled by this, add up all the fees and repayments you will pay over the life of your loan and let this figure guide your decision.
4. Adding the application fees into your loan amount
The dealer might quote you a loan with no upfront costs. This is a good sales tactic, particularly for buyers who have a smaller deposit to contribute. If this has been offered to you, make sure that the upfront fees haven’t been financed in your loan amount. This could end up costing you in the long-run.
5. Look out for ‘balloon’ payments
Similarly to longer loan terms, structuring a balloon payment into the end of your loan will make your ongoing repayment amount cheaper. This will make your finance option seem more appealing on face value, but you need to ask yourself: “Will I be able to afford the lump sum payment at the end of my loan?” If you can’t then the financier may let you extend your loan — however this might mean facing a higher interest rate.
At the end of the day if you want an affordable and transparent finance option for your new car the key is comparison. Do your research online or speak to a broker, and remember— if the offer seems too good to be true it probably is.
Learn more about the author – Don Farquharson.